Deep divisions emerged among top bankers over the future shape of the industry on Wednesday as business secretary Vince Cable threatened to get tough with banks over their failure to bolster lending to small businesses.

At a lengthy appearance before the Treasury select committee, Stephen Hester, chief executive of bailed-out Royal Bank of Scotland, warned the value of the taxpayer's 84% stake in the bank could be reduced by the proposals of the independent banking commission to "ring-fence" retail operations. "I think if we went down that route there will be greater costs, and those costs would be divided between shareholders, customers and the economy as a whole," he said.

Hester, parachuted in at the time of RBS's October 2008 bailout, also spoke out against the "moral hazard" of ring-fencing high street operations away from a financial institution's riskier investment banking operations, which he said could "create a protected beast that the government will support". He also conceded that the taxpayer guarantee of the financial system may have helped banks pay bonuses. "It is entirely possible," he said.

Sitting alongside him, Douglas Flint, chairman of HSBC, presented proposals that set out how ring-fencing could be achieved. Bob Diamond, chief executive of Barclays, conceded that while ring-fencing was not his preferred option, it looked likely to be pursued by the independent commission, led by Sir John Vickers, in their final report, due in September. And for his part, António Horta-Osório, the new boss of Lloyds Banking Group, made clear that he believed there were advantages to ring-fencing that "reduced the complexity" of banks.

The four top bankers appeared before MPs hours after Cable was accused by the Unite union of issuing "empty threats" to slap taxes on banks if they did not meet their commitments to lend £190bn.

Cable told the business, innovation and skills select committee that he had written to bankers to demand evidence that executive pay was being linked to lending, as had been pledged under the Project Merlin agreement between the banks and the government, but admitted that it would be difficult for him to take sanctions against individual banks. He appeared to indicate that only Lloyds and Santander were meeting their pledges by the first quarter of the year.

At the Treasury select committee, bankers warned MPs of the impact of higher capital requirements on their ability to lend. Diamond said he was concerned that the requirement for banks to hold a certain amount of assets in reserve – which has risen from £180bn to £500bn during the crisis – was getting too high, while Flint added that there were potential costs to the economy if capital ratios rose much above 10%.

Diamond – who took the opportunity to rectify his mistake at a previous appearance of not appearing grateful for the implicit taxpayer support the banking system receives – revealed that Barclays had spent £30m on creating a "living will" demanded by the regulators. This resolution and recovery plan is intended to allow parts of banks such as Barclays to fail without recourse to the taxpayer. "We can have a plan in place between September and March to really be stress-tested," Diamond said.

He was at pains to insist that Barclays did not use retail deposits to subsidise the bank's investment banking arm, Barclays Capital, despite comments by Horta-Osório that retail deposits did help reduce the costs of running investment banks.

The Lloyds boss kept up his opposition to suggestions by the Vickers commission that the bank be forced into selling off more branches than the 600 already mandated by the EU as the price of receiving state aid. The sales particulars for those branches are being released shortly and Horta-Osório said he hopes to have "serious indicative offers by the end of July".

The bosses of Britain's four biggest banks were hauled before the Treasury select committee to discuss the independent banking commission's proposals. Follow the action as it happened with Jill Treanor